In business financing, an unsecured credit line is a flexible resource that meets the short-term financial needs of a growing business. You do not have to insure the loaned funds using collateral or assets. Instead, a fixed annual fee is charged when you access the money; the rate varies by credit line. Some lenders even waive the annual fee for the first year. However, there are pros and cons to be aware of when opening an unsecured credit line.
The Advantages
With an unsecured credit line, there are no access restrictions. You can borrow the money as needed and pay it off at you convenience. Access it anytime simply by writing a check.
It is as easy as using a credit card without the recurring interest hassles. As long as you pay the balance due, the money will be there when you need it. This is an advantage over other unsecured loans because the credit line can be used repeatedly without having to re-apply for funds. The interest rate depends on the lender, but as a rule, it’s significantly lower than a credit card. Typically, it will not exceed 6% above prime.
The Disadvantages
An unsecured credit line has a lower limit than a traditional loan. This is to offset the risk of offering collateral-free money. Lenders will not take undo risk without a guarantee that their investment will be paid back. Business owners can come to the table with some optional assets and be given a higher limit; this is at the discretion of the lender.
Credit lines can be habit forming. Once you start borrowing against future revenue it can be difficult to stop. Accountability and educated restraint will help counter these drawbacks and keep your business in check.
Eligibility Requirements
Not everyone is eligible for an unsecured credit line. One needs to meet certain criteria needs in order for businesses to qualify.
Here are the basics:
· Have a previously established credit history on record with the Small Business Financial Exchange. This can be based on other loans or credit accounts, but don’t have too many credit lines. You don’t want your debt ratio to affect the qualification process.
· Credit check or no credit check; keep your score at 660 or higher so qualification isn’t a gamble.
· Make sure your business has been established between 6 months and two years (depending on the lending requirements).
· Proof of annual revenue.
· Make payments on time.
· Review your credit report quarterly and work to improve your rating.
Lenders can deny an applicant based on debt delinquency or a previous bankruptcy. New businesses, that do not meet the qualifications, can ask for a minimum credit line. Always read the lending terms fully before signing anything.
If your business is in need of immediate cash flow at a reasonable interest rate, than an unsecured credit line may be just the solution you’re looking for. When used wisely it can open the door to a profitable future.
